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Jeffrey Thiemann Charles Schwab Investment Management January 12, 2011

California Debt and Investment Advisory Commission Short-term and Interim Financing Strategies Seminar. Jeffrey Thiemann Charles Schwab Investment Management January 12, 2011. Money Market Funds: A Few Key Facts.

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Jeffrey Thiemann Charles Schwab Investment Management January 12, 2011

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  1. California Debt and Investment Advisory Commission Short-term and Interim Financing Strategies Seminar Jeffrey ThiemannCharles Schwab Investment ManagementJanuary 12, 2011

  2. Money Market Funds: A Few Key Facts Money market funds are governed by Rule 2a-7 of the Investment Company Act of 1940. Rule 2a-7 imposes limits on money market funds for credit quality, diversification, and maturity. • Funds may invest only in high quality “eligible securities” • Exposures to a single issuer generally limited to no more than 5% of total fund assets • Maturity limits on both individual securities and of the overall weighted average portfolio

  3. Money Market Funds: A Few Key Facts • Credit Quality • Eligible securities limited to securities rated in the two highest short-term rating categories by Moody’s, S&P, and Fitch, or if unrated, that are of comparable credit quality. • At least 97% of assets must be “First Tier” securities, which are defined as securities that are rated in the highest short-term rating category by these agencies (e.g., MIG1, SP-1 or SP-1+, and F1 or F1+), or if unrated, of comparable credit quality. • Regardless of ratings, the fund’s investment advisor must independently determine that these investments present “minimal credit risk”.

  4. Money Market Funds: A Few Key Facts • Diversification • Requirements vary depending on type of fund (taxable, national tax-exempt and single state tax exempt). • For taxable and national tax-exempt funds, investment in securities issued by an issuer is limited to 5% of total fund assets. For single state funds, that 5% limitation applies to 75% of the fund’s total assets. • The rule includes additional diversification requirements for securities with demand features and guarantees (e.g., bond insurance and letters of credit). • Maturity • Securities must have a remaining maturity of 397 days or less (i.e., 13 months). • Securities with a nominal maturity date in excess of 397 days may be eligible under some circumstances. Bonds that are subject to a demand feature (e.g., variable rate demand obligations) may be “deemed” to mature on the date in which the principal amount must be paid through the demand feature. • Rule 2a-7 limits the dollar-weighted average portfolio maturity (WAM) to 60 calendar days.

  5. California Tax and Revenue Anticipation Notes (TRANs) Minimal credit risk standard for investment in money market funds. Other investment considerations: • Ability to maintain Tier 1 status through the investment period • Liquidity of the name in the overall market Minimum information requirements: • Actual cash flow results for the prior fiscal year • Projected cash flow for the current fiscal year • Borrowable resources or other sources of additional liquidity, both current and projected • Historical financial results, e.g., general fund GAAP and/or unaudited results • Proposed or enacted budget

  6. California Tax and Revenue Anticipation Notes (TRANs) Key metrics: • TRANs size, relative to projected receipts • Set aside dates; coverage at set-asides • Net projected debt service coverage (gross vs. net) • Unused cash relative to total disbursements

  7. California Tax and Revenue Anticipation Notes (TRANs) Evaluating the credibility of cash flow projections: • Is there sufficient detail by major line item to test the reasonableness of the projection? • What are the key assumptions? • How does growth or decline compare relative to historical experience? • How have the projections incorporated known revenue/expenditure impacts (e.g., state deferrals)? • Does the projected cash flow projection square with the proposed/enacted budget? • Ability to confirm cash balances, including alternate liquidity cash balances, with audited financial information? • Do I understand the derivation and availability of the alternative liquidity? Continuing disclosure: • Cash flow actual performance vs. projection • Other available financial information

  8. Other Short-term Debt Instruments • Commercial Paper (bank vs. self liquidity) • Variable Rate Demand Obligations (VRDOs) • Bond Anticipation Notes (BANs)

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